Liquidity Enhancing Activities
United Airlines, Inc. (“United”), a wholly-owned
subsidiary of United Airlines Holdings, Inc. (“UAL” and, together with United, the “Company”), expects
to have approximately $17 billion of available liquidity at the end of the third quarter of 2020, which includes liquidity available
under the Company’s $2 billion revolving credit facility, $5 billion of committed financing to be secured by the Company’s
loyalty program, MileagePlus (further described below), as well as $4.5 billion expected to be available to the Company through
the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) Loan Program.
The Company continues to work with the U.S. Treasury Department
on the CARES Act Loan Program loan, and it is the Company’s expectation that, if the Company takes the loan, it will use
available slots, gates and routes collateral. The Company believes it has sufficient slots, gates and routes collateral available
to meet the collateral coverage that may be required for the full $4.5 billion available to the Company under the Loan Program.
MileagePlus Financing
On
June 12, 2020, UAL, United and their subsidiaries Mileage Plus Holdings, LLC (“MPH”) and Mileage Plus Intellectual
Property Assets, Ltd. (“MIPA”) entered into a commitment letter (the “Commitment Letter”) with Goldman
Sachs Lending Partners LLC (“GSLP”), Barclays Bank PLC and Morgan Stanley Senior Funding, Inc. (collectively, the “Lead
Arrangers” or the “Committed Lenders”) pursuant to which, the Committed Lenders have committed to provide MPH
and MIPA with, and the Lead Arrangers have agreed to arrange, a term loan facility of up to $5.0 billion, subject to the satisfaction
of certain customary conditions (the “MileagePlus Financing”). GSLP will act as sole structuring agent and lead left
arranger for the MileagePlus Financing. It is expected that MPH and MIPA will seek long-term debt financing in lieu of borrowing
the full available amount under the committed term loan facility, or in order to refinance amounts drawn under the committed term
loan facility, subject to market and other conditions.
Prior to the closing of the proposed MileagePlus Financing,
United and MPH will contribute to MIPA their respective rights to certain MileagePlus intellectual property, including brands and
member data. The debt issued in the proposed MileagePlus Financing will be secured on a first priority basis by, among other things,
the assets of MIPA, MPH and their subsidiaries, specified cash accounts that include the accounts into which MileagePlus revenues
are or will be paid by its marketing partners and by United, and pledges of the equity in MIPA, MPH and certain additional subsidiaries.
In addition, UAL, United and certain of their subsidiaries, including all subsidiaries of MPH, will provide senior guarantees of
the obligations under the proposed MileagePlus Financing. MIPA and MPH will continue to be wholly-owned subsidiaries of UAL and
United, and the MileagePlus program is expected to continue to operate as it has in the past. The agreements governing the MileagePlus
Financing will include the requirement that, upon the occurrence of certain mandatory prepayment events, which include, among others,
issuances of debt other than permitted debt, MPH and MIPA will prepay the MileagePlus Financing debt to the extent of any cash
proceeds received in connection with such prepayment event, plus an applicable premium. In addition, the financing documents will
provide that an uncured early amortization event, which includes, among others, the failure to meet a required debt service coverage
ratio, will require MPH and MIPA to make one or more early amortization payments. The occurrence of an event of default under the
financing documents may cause the entire outstanding portion of the MileagePlus Financing debt to become immediately due and payable.
Following the closing of the proposed MileagePlus Financing,
MPH and MIPA intend to lend to the Company the net proceeds from the MileagePlus Financing, after depositing a portion of such
proceeds in a reserve account.
The MileagePlus Financing is expected to be seamless for both
MileagePlus members and partners, with no change in the day-to-day operations of the program.
Multiplying MPH 2019 EBITDA by a factor of 12 equates to a
MileagePlus valuation of approximately $21.9 billion.
In
connection with commencing discussions with potential investors in the proposed MileagePlus Financing, the Company is making available
certain information about MPH and the proposed MileagePlus Financing, a copy of which is attached to this report as Exhibit
99.1, and a term sheet setting forth the significant terms and conditions of the proposed MileagePlus Financing, a copy of which
is attached to this report as Exhibit 99.2.
There is no assurance that the proposed MileagePlus Financing
will be completed on the terms described herein or at all or when it may be completed.
Company Outlook
The Company continues to see a steady improvement in demand
in the domestic United States and certain international destinations, with a more than 70% reduction in customer cancellation rates
since the high rates experienced in April 2020. June ticketed passenger revenue is expected to be up close to 400% versus April.
Net bookings for the remainder of the second quarter and the
third quarter have remained positive since the end of May.
As such, for July 2020 the Company expects consolidated capacity
to be down approximately 75%, and domestic capacity to be down approximately 70%, which is almost double the June 2020 schedule.
The Company also expects July passenger revenue to be up between 50% and 100% versus the Company’s June 2020 passenger revenue
estimate.
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April 2020
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May 2020
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June 2020E
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July 2020E
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Available Seat Miles1 year-over-year
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down 88%
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down 88%
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down ~85%
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down ~75%
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Domestic
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down 84%
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down 85%
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down ~85%
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down ~70%
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International
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down 93%
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down 92%
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down ~90%
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down ~80%
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Passenger Load Factor2 year over year
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16%
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35%
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~50%
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~55%
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Domestic
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13%
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39%
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~60%
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International
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20%
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25%
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~40%
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Ticketed Passenger Revenue3 year-over-year
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down 98%
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down 95%
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down ~90%
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down 82% - 88%
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Gross year-over-year bookings4
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down 87%
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down 82%
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down 73%5
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1
The number of seats available for passengers multiplied by the number of scheduled miles those seats are flown.
2
Revenue passenger miles divided by available seat miles.
3
Ticketed passenger revenue is a component of total passenger revenue. It excludes ancillary fees and frequent flyer revenue (including
both passengers flying on awards and the deferred revenue associated with frequent flyer miles earned will traveling) among other
items, which are reported as part of passenger revenue. It also excludes passenger revenue associated with expired tickets, other
airline interline billing differences, certain travel agency commissions, charters, customer compensation for oversold flights,
and changes fees.
4
Gross bookings include new bookings made for all future time periods as compared to the corresponding month in 2019.
5
June gross bookings reflect month-to-date bookings through June 13, 2020.
Cargo revenues continue to be strong and are expected to be
up over 30% in the second quarter of 2020 versus the second quarter of 2019. These results support international cargo-only flying
and have been a significant driver of revenue and cash flow to the Company.
Including Cargo and other revenue, the Company now expects total
revenues to be down 88% in the second quarter of 2020 compared to the second quarter of 2019.
The Company has aggressively managed its costs and capital expenditures
to preserve cash. Operating expenses in the second quarter are expected to decline by 53% as compared to the second quarter of
2019. Operating expenses excluding special charges, salaries and related costs and depreciation are expected to decline by 72%
in the second quarter or $4.6 billion.6 In addition, the Company is on track to achieve more than $2.5 billion of
full-year reductions in adjusted capital expenditures, bringing expected 2020 full-year adjusted capital expenditures to below
$4.5 billion.7
The
Company currently expects average daily cash burn for the second quarter of 2020 to be at the low end of the previously-provided
guidance range of between $40 million and $45 million, at approximately $40 million per day. The Company also currently expects
average daily cash burn in the third quarter of 2020 to be approximately $30 million per day. For this purpose, “cash
burn” is defined as net cash from operations, less investing and financing activities. Proceeds from the issuance of new
debt (excluding expected aircraft financing), government grants associated with the Payroll Support Program of the CARES Act and
any new issuances of UAL common stock are not included in this figure.
The Company expects to end the second quarter of 2020 with approximately
$9.4 billion in total liquidity which does not include the proposed MileagePlus Financing, the approximately $500 million of funding
to be received under the Payroll Support Program of the CARES Act, which is expected to be received in July 2020, or the $4.5 billion
CARES Act loan.
In the second quarter of 2020, the Company’s wholly-owned
subsidiary, MPH, expects to record revenue, net of redemptions, of $300 to $350 million. In April and May 2020, MPH recorded
cash flow from sales of $270 million and $185 million, respectively, which results are preliminary and subject to change.
While
the Company has seen improvements in the demand environment as described above, it continues to expect that demand will
be reduced year-over-year as of October 1, 2020. Since March 2020, thousands of Company employees have elected to take part in
voluntary programs, including leaves of absences, reduced work hours and voluntary separation programs. The Company plans to continue
to use these and similar programs to align payroll expenses with the demand environment and is continuing negotiations with its
labor union partners; however, it is possible that the Company may need to use furloughs or other measures to align its payroll
expenses with the demand environment. As required by applicable federal and state law, including the Worker Adjustment and Retraining
Notification Act of 1988, the Company anticipates issuing certain required notices to employees in July 2020.
Update to Risk Factors
The Company is providing the following risk factors to update
the risk factors of the Company previously disclosed in periodic reports filed with the U.S. Securities and Exchange Commission
(the “SEC”), including its Annual Report on Form 10-K for the fiscal year ended December 31, 2019 (the “2019
Form 10-K”) and its Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2020 (the “Q1 2020 Form 10-Q”).
6
Operating expenses excluding special charges, salaries and related costs and depreciation is a non-GAAP measure and certain components,
including special charges, are not determinable at this time. Accordingly, the Company is not providing this guidance on a GAAP
basis.
7
Non-cash capital expenditures are not determinable at this time. Accordingly, the Company is not providing capital expenditure
guidance on a GAAP basis.
The global pandemic resulting from a novel strain of coronavirus
has had an adverse impact that has been material to the Company's business, operating results, financial condition and liquidity,
and the duration and spread of the pandemic could result in additional adverse impacts. The outbreak of another disease or similar
public health threat in the future could also have an adverse effect on the Company's business, operating results, financial condition
and liquidity.
In December 2019, a novel strain of coronavirus ("COVID-19")
was reported in Wuhan, China, and the World Health Organization (the "WHO") subsequently declared COVID-19 a "pandemic."
As a result of COVID-19, the U.S. government has declared a national emergency, the U.S. Department of State has issued numerous
travel advisories, including a global Level 4 "do not travel" advisory advising U.S. citizens to avoid all international
travel, and the U.S. government has implemented a number of travel-related protocols, including enhanced screenings and mandatory
14-day quarantines. Many foreign and U.S. state governments have instituted similar measures and declared states of emergency.
In the United States and other locations around the world, throughout
the first half of 2020, people were instructed to stay home or “shelter in place” and public events, such as conferences,
sporting events and concerts, have been canceled, attractions, including theme parks and museums, have been closed, cruise lines
have suspended operations and schools and businesses are operating with remote attendance, among other actions. In addition, governments,
non-governmental organizations and entities in the private sector have issued non-binding advisories or recommendations regarding
air travel or other social distancing measures, including limitations on the number of persons that should be present at public
gatherings. While “shelter in place” restrictions and similar advisories and recommendations have been reduced or otherwise
eased in certain circumstances, this varies by jurisdiction and organization. In addition, numerous jurisdictions have provided
that more severe restrictions could be reimposed or newly imposed depending on the continued spread of COVID-19. In that case,
other governmental restrictions and regulations in the future in response to COVID-19 could include additional travel restrictions
(including restrictions on domestic air travel within the United States, requirements for passengers to wear face coverings while
traveling, requirements for passengers to submit to temperature checks or other health examinations prior to entering an airport
or boarding an airplane or requirements to limit the number of seats that can be occupied on an aircraft to allow for social distancing),
quarantines of additional populations (including our personnel), restrictions on our ability to access our facilities or aircraft,
requirements to collect additional passenger data or requirements to conduct testing on our personnel or passengers.
The Company began experiencing a significant decline in international
and domestic demand related to COVID-19 during the first quarter of 2020. The decline in demand caused a material deterioration
in our revenues in the first quarter of 2020, resulting in a first quarter net loss of $1.7 billion. Although during the second
quarter of 2020 the Company has experienced steady improvement in demand, the Company currently expects our results of operations
for the second quarter of 2020 and full-year 2020 to be materially impacted and that we will incur a net loss for the second quarter
of 2020 and full-year 2020. For planning purposes, the Company has assumed that demand will remain suppressed for the remainder
of 2020 and likely into 2021. The Company expects its scheduled capacity,
relative to 2019 levels, for June 2020 to be down approximately 85% and for July 2020 to be down approximately 75%. The Company
plans to continue to proactively evaluate and cancel flights on a rolling 60-day basis until it sees signs of a recovery in demand.
The Company has taken a number of actions in response to decreased
demand. In addition to the schedule reductions discussed above, the Company has reduced its planned capital expenditures and reduced
operating expenditures for the remainder of 2020 and 2021 (including by postponing projects deemed non-critical to the Company's
operations), suspended share repurchases under its share repurchase program and subsequently terminated the program, entered into
approximately $3.0 billion in secured term loan facilities and new aircraft financings, raised approximately $1.1 billion in cash
proceeds in an underwritten public offering of UAL common stock, entered into an agreement to finance certain aircraft currently
subject to purchase agreements through a sale and leaseback transaction, temporarily grounded certain of its mainline fleet and
taken a number of human capital management actions. In addition, on April 20, 2020, in connection with the Payroll Support Program
under the CARES Act, United entered into a Payroll Support Program Agreement with the U.S. Treasury Department providing the Company
with total funding of approximately $5.0 billion to pay the salaries and benefits of employees through September 30, 2020. The
Company has received approximately $3.5 billion of the expected $5.0 billion through the Payroll Support Program under the CARES
Act. Approximately $1.0 billion of the remaining balance is expected by the end of June 2020, and approximately $500 million of
the remaining balance is expected by the end of July 2020. The Company also expects to have the ability, through September 30,
2020, to borrow up to approximately $4.5 billion from the U.S. Treasury Department for a term of up to five years pursuant to the
Loan Program under the CARES Act. The grants and/or loans under the CARES Act will subject the Company and its business to certain
restrictions, including, but not limited to, restrictions on the payment of dividends and the ability to repurchase UAL's equity
securities, requirements to maintain certain levels of scheduled service, requirements to maintain employment levels through September
30, 2020, requirements to issue warrants for UAL common stock to the U.S. Treasury Department and certain limitations on executive
compensation. These restrictions have materially affected and will continue to materially affect the Company’s operations,
and the Company may not be successful in managing these impacts for the duration of the restrictions. In particular, limitations
on executive compensation, which, depending on the form of aid, could extend up to six years, may impact the Company's ability
to attract and retain senior management or attract other key employees during this critical time. Furthermore, the Company has
also entered into a commitment letter for the proposed MileagePlus Financing.
The
Company continues to focus on reducing expenses and managing its liquidity. The Company currently expects average daily
cash burn for the second quarter of 2020 to be approximately $40 million per day. The Company also currently expects average daily
cash burn in the third quarter of 2020 to be approximately $30 million per day. For this purpose, “cash burn” is defined
as net cash from operations, less investing and financing activities. Proceeds from the issuance of new debt (excluding expected
aircraft financing), government grants associated with the Payroll Support Program of the CARES Act and any new issuances of UAL
common stock are not included in this figure. We expect to continue to modify our cost management, liquidity-raising efforts and
capacity as the timing of demand recovery becomes more certain. The Company's reduction in expenditures, measures to improve liquidity
or other strategic actions that the Company may take in the future in response to COVID-19 may not be effective in offsetting decreased
demand, and the Company will not be permitted to take certain strategic actions as a result of the CARES Act, which could result
in a material adverse effect on the Company's business, operating results and financial condition.
The full extent of the ongoing impact of COVID-19 on the Company's
longer-term operational and financial performance will depend on future developments, many of which are outside of our control,
including the effectiveness of the mitigation strategies discussed above, the duration and spread of COVID-19 and related travel
advisories and restrictions, the impact of COVID-19 on overall long-term demand for air travel, including the impact on overall
demand for business travel as a result of increased usage of teleconferencing and other technologies, the impact of COVID-19 on
the financial health and operations of the Company's business partners and future governmental actions, all of which are highly
uncertain and cannot be predicted. The COVID-19 pandemic has had a material impact on the Company, and the continuation of reduced
demand could have a material adverse effect on the Company's business, operating results, financial condition and liquidity.
In addition, an outbreak of another disease or similar public
health threat, or fear of such an event, that affects travel demand, travel behavior or travel restrictions could have a material
adverse impact on the Company's business, financial condition and operating results. Outbreaks of other diseases could also result
in increased government restrictions and regulation, such as those actions described above or otherwise, which could adversely
affect our operations.
The Company has a significant amount of financial leverage
from fixed obligations and intends to seek material amounts of additional financial liquidity in the short-term, and insufficient
liquidity may have a material adverse effect on the Company's financial condition and business.
The Company has a significant amount of financial leverage from
fixed obligations, including aircraft lease and debt financings, leases of airport property, secured loan facilities and other
facilities, and other material cash obligations. In addition, the Company has substantial noncancelable commitments for capital
expenditures, including for the acquisition of new aircraft and related spare engines.
In addition, in response to the travel restrictions, decreased
demand and other effects the COVID-19 pandemic has had and is expected to have on the Company's business, the Company currently
intends to continue to seek material amounts of additional financial liquidity in the short-term, which may include the proposed
MileagePlus Financing, the proposed drawing of loans under the Loan Program of the CARES Act, the issuance of additional unsecured
or secured debt securities, equity securities and equity-linked securities, the sale of assets as well as additional bilateral
and syndicated secured and/or unsecured credit facilities, among other items. There can be no assurance as to the timing of any
such incurrence or issuance, which may be in the near term, or that any such additional financing will be completed on favorable
terms, or at all. Furthermore, if we consummate the proposed MileagePlus Financing, our indebtedness will increase significantly.
As of March 31, 2020, after giving effect to our borrowing on April 7, 2020 of a $250 million secured term loan and our borrowings
on April 21 and May 29, 2020 of an aggregate of $1.0 billion under a senior unsecured promissory note to the U.S. Treasury Department
pursuant to the Payroll Support Program of the CARES Act, we had total long-term debt of $18.5 billion and $2.0 billion available
for borrowing under our revolving credit facility. We also expect to receive an additional approximately $5.0 billion of proceeds
in connection with the consummation of the proposed MileagePlus Financing and an additional $4.5 billion under the Loan Program
under the CARES Act.
The
Company's substantial level of indebtedness, the Company’s non-investment grade credit rating and the availability of Company
assets as collateral for loans or other indebtedness, which available collateral has been reduced as a result of additional secured
term loan facilities and would be reduced as a result of the proposed MileagePlus Financing, any CARES Act Loan Program borrowings
and other future liquidity-raising transactions, may make it difficult for the Company to raise additional capital if needed to
meet its liquidity needs on acceptable terms, or at all. Furthermore, the commitment letter for the proposed MileagePlus
Financing limits our ability to access the capital markets in certain circumstances beginning on the date on which we entered into
the commitment letter and ending on the earlier of forty-five days after the funding of the term loan facility and the successful
syndication of the MileagePlus Financing.
Although the Company's cash flows from operations and its available
capital, including the proceeds from financing transactions, have been sufficient to meet its obligations and commitments to date,
the Company's liquidity has been, and may in the future be, negatively affected by the risk factors discussed in the 2019 Form
10-K, as updated by the Q1 2020 Form 10-Q and this report, including risks related to future results arising from the COVID-19
pandemic. If the Company's liquidity is materially diminished, the Company’s cash flow available for general corporate purposes
may be materially and adversely affected. In particular, with respect to the proposed MileagePlus Financings, the cash flows generated
by the MileagePlus business would be required to first satisfy interest and principal due thereunder. Therefore, following the
consummation of the proposed MileagePlus Financing, the cash generated by the MileagePlus program will not be fully available for
our operations or to satisfy our other indebtedness obligations for the seven-year term of the proposed MileagePlus Financing debt.
This limitation on our cash flows could have a material adverse effect on our operations and flexibility.
A material reduction in the Company’s liquidity could
also result in the Company not being able to timely pay its leases and debts or comply with material provisions of its contractual
obligations, including covenants under its financing and credit card processing agreements. Moreover, as a result of the Company's
recently-completed financing activities in response to the COVID-19 pandemic, the number of financings with respect to which such
covenants and provisions apply has increased, thereby subjecting the Company to more substantial risk of cross-default and cross-acceleration
in the event of breach, and additional covenants and provisions could become binding on the Company as it continues to seek additional
liquidity. In addition, the Company has agreements with financial institutions that process customer credit card transactions for
the sale of air travel and other services. Under certain of the Company's credit card processing agreements, the financial institutions
in certain circumstances have the right to require that the Company maintain a reserve equal to a portion of advance ticket sales
that have been processed by that financial institution, but for which the Company has not yet provided the air transportation.
Such financial institutions may require cash or other collateral reserves to be established or withholding of payments related
to receivables to be collected, including if the Company does not maintain certain minimum levels of unrestricted cash, cash equivalents
and short-term investments. In light of the effect COVID-19 is having on demand and, in turn, capacity, the Company has seen an
increase in demand from consumers for refunds on their tickets, and we anticipate some level of increased demand for refunds on
tickets will continue to be the case for the near future. Refunds lower our liquidity and put us at risk of triggering liquidity
covenants in these processing agreements and, in doing so, could force us to post cash collateral with the credit card companies
for advance ticket sales. The Company also maintains certain insurance- and surety-related agreements under which counterparties
may require collateral.
In addition to the foregoing, the degree to which we are leveraged
could have important consequences to holders of our securities, including the following:
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·
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we must dedicate a substantial portion of cash flow from operations to the payment of principal and interest on applicable
indebtedness, which, in turn, reduces funds available for operations and capital expenditures;
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·
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our flexibility in planning for, or reacting to, changes in the markets in which we compete may be limited;
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we may be at a competitive disadvantage relative to our competitors with less indebtedness;
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we are rendered more vulnerable to general adverse economic and industry conditions;
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we are exposed to increased interest rate risk given that a portion of our indebtedness obligations are at variable interest
rates; and
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our credit ratings may be reduced and our debt and equity securities may significantly decrease in value.
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Finally, as of May 31, 2020, the Company had $7.3 billion in
variable rate indebtedness, all or a portion of which uses London interbank offered rates ("LIBOR") as a benchmark for
establishing applicable rates. As announced in July 2017, LIBOR is expected to be phased out by the end of 2021. Although many
of our LIBOR-based obligations provide for alternative methods of calculating the interest rate payable if LIBOR is not reported,
the extent and manner of any future changes with respect to methods of calculating LIBOR or replacing LIBOR with another benchmark
are unknown and impossible to predict at this time and, as such, may result in interest rates that are materially higher than current
interest rates. If interest rates applicable to the Company's variable interest indebtedness increase, the Company's interest expense
will also increase, which could make it difficult for the Company to make interest payments and fund other fixed costs and, in
turn, adversely impact our cash flow available for general corporate purposes.
See Part I, Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations, of the Q1 2020 Form 10-Q for additional information regarding the Company's liquidity
as of March 31, 2020.
The proposed MileagePlus Financing may not be completed.
The obligation of the Committed Lenders to fund the proposed
MileagePlus Financing is subject to a number of customary conditions precedent set forth in their commitment letter, including,
among others, the absence of a material adverse change from December 31, 2019 until the time of funding, except as disclosed in
our public filings. A material adverse change under the commitment letter means a material adverse effect on the Company’s
consolidated operations, business or financial condition taken as a whole, the validity or enforceability of the documentation
governing the proposed MileagePlus Financing or the rights or remedies of the lenders and secured parties thereunder, the ability
of MPH and MIPA to pay the obligations under such documentation, the validity of, enforceability of or collectability under certain
agreements constituting collateral for the financing, taken as a whole or the ability of MPH, MIPA, UAL or United to perform their
obligations under certain of such agreements. The occurrence of this and certain other conditions precedent are outside of our
control. We may not be able to complete the MileagePlus Financing if we are not able to satisfy any of these conditions precedent
or if other events were to occur. Because the MileagePlus program is one of our most significant unencumbered assets, if
the proposed MileagePlus Financing is not completed, we will likely need to pursue other financing alternatives, and there is no
assurance that we will be able to consummate any such alternatives on acceptable terms or at all.
If we are not able to comply with the covenants in the
proposed MileagePlus Financing agreements, our lenders could accelerate the MileagePlus indebtedness, foreclose upon the collateral
securing the MileagePlus indebtedness or exercise other remedies, which would have a material adverse effect on our business, results
of operations and financial condition.
The covenants in the agreements governing the proposed MileagePlus
Financing contain a number of provisions that will limit our ability to modify aspects of the MileagePlus program if such modifications
would be reasonably expected to have a material adverse effect on the MileagePlus program or on our ability to pay the obligations
under the MileagePlus Financing agreements. Moreover, the terms of such agreements will also place certain restrictions on our
establishing or owning another mileage or loyalty program and our ability to make material modifications to our agreements with
certain MileagePlus partners. Furthermore, the proposed MileagePlus Financing may also negatively affect certain material business
relationships, and if any such relationship were to be materially impaired and/or terminated, we could experience a material adverse
effect on our business, results of operations and financial condition.
The agreements governing the proposed MileagePlus Financing
will restrict our ability to terminate or modify the intercompany agreements governing the relationship between United and the
MileagePlus program, including the agreement governing the rate that United must pay MPH for the purchase of miles and United’s
obligation to make certain seat inventory available to MPH for redemption. Such restrictions will be in addition to restrictions
on the ability of the obligors under the MileagePlus indebtedness to make restricted payments, incur additional indebtedness, dispose
of, create or incur certain liens on, or transfer or convey, the collateral securing the MileagePlus indebtedness, enter into certain
transactions with affiliates, merge, consolidate, or sell assets, or designate certain subsidiaries as unrestricted. Complying
with these covenants may restrict our ability to make material changes to the operation of the MPH business and may limit our ability
to take advantage of business opportunities that may be in our long-term interest. We may also take actions, or omit to take actions,
to comply with such covenants that could have a material adverse effect on our business and operations.
Our failure to comply with any of these covenants or restrictions
could result in a default under the agreements governing the proposed MileagePlus Financing, which could lead to an acceleration
of the debt under such instruments and, in some cases, the acceleration of debt under other instruments that contain cross-default
or cross-acceleration provisions, each of which could have a material adverse effect on us. In the case of an event of default
under the agreements governing the MileagePlus Financing agreements, or a cross-default or cross-acceleration under our other indebtedness,
we may not have sufficient funds available to make the required payments. If we are unable to repay amounts owed under the agreements
governing the proposed MileagePlus Financing, the lenders or noteholders thereunder may choose to exercise their remedies in respect
of the collateral securing such indebtedness, including foreclosing upon the MileagePlus collateral, in which case we would lose
the right to operate the MileagePlus program thereafter. The exercise of such remedies, especially the loss of the MileagePlus
program, would have a material adverse effect on our business, results of operations and financial condition.
In connection with the proposed MileagePlus Financing, we will
be required to contribute certain assets, including certain MileagePlus intellectual property, including brands and member data,
to a newly-formed subsidiary structured to be bankruptcy remote that will serve as a co-issuer of the MileagePlus Financing indebtedness,
the assets of which subsidiary will be collateral for such indebtedness. United and MPH will have the right to use the contributed
intellectual property pursuant to a license agreement with the newly formed subsidiary. Such license agreement will be terminated,
and our right to use such intellectual property will cease, upon specified termination events, including, but not limited to, our
failure to assume the license agreement and various related intercompany agreements in a restructuring process. The termination
of the license agreement would be an event of default under the agreements governing the MileagePlus Financing and in certain circumstances
would trigger a liquidated damages payment in an amount that is several multiples of the principal amount of the MileagePlus Financing
debt. Thus, the terms of the MileagePlus Financing will limit our flexibility to manage our capital structure going forward, and
as a result, in the future we may take actions to ensure that the MileagePlus Financing debt is satisfied or that the lenders’
remedies under such debt are not exercised, potentially to the detriment of our other creditors.
Our significant investments in AVH and its affiliates,
and the commercial relationships that we have with Avianca may not produce the returns or results we expect.
In November 2018, as part of our global network strategy, United
entered into a revenue-sharing joint business arrangement (“JBA”) with Aerovías del Continente Americano S.A.
(“Avianca”), a subsidiary of Avianca Holdings, S.A. (“AVH”), Copa Airlines and several of their respective
affiliates, subject to regulatory approval. Concurrently with this transaction, United, as lender, entered into a Term Loan Agreement
(the “BRW Term Loan Agreement”) with, among others, BRW Aviation Holding LLC (“BRW Holding”) and BRW Aviation
LLC (“BRW”), as guarantor and borrower, respectively. Pursuant to the BRW Term Loan Agreement, United provided to BRW
a $456 million term loan (the “BRW Term Loan”), secured by a pledge of BRW's equity, as well as BRW's 516 million common
shares of AVH (which are eligible to be converted into the same number of preferred shares, which may be deposited with the depositary
for AVH's American Depositary Receipts (“ADRs”), the class of AVH securities that trades on the New York Stock Exchange
(the “NYSE”), in exchange for 64.5 million ADRs) (such shares and equity, collectively, the “BRW Loan Collateral”).
In connection with funding the BRW Term Loan Agreement, the Company entered into an agreement with Kingsland Holdings Limited,
AVH's largest minority shareholder (“Kingsland”), pursuant to which United granted to Kingsland a right to put its
AVH common shares to United at market price on the fifth anniversary of the BRW Term Loan Agreement or upon certain sales of AVH
common shares owned by BRW, including upon a foreclosure of United's security interest or any completed liquidation or dissolution
of AVH, and also guaranteed BRW's obligation to pay Kingsland the excess, if any, of $12 per ADR on the NYSE and such market price
of AVH common shares on the fifth anniversary, or upon any such sale, as applicable (the “Cooperation Payment”), for
an aggregate maximum possible combined put payment and guarantee amount of $217 million. See Notes 7 and 9 to the financial statements
included in Part I, Item 1 of the Q1 2020 Form 10-Q for additional information regarding our obligations to Kingsland and their
interrelationship with the BRW Term Loan Agreement.
BRW is currently in default under the BRW Term Loan Agreement.
In order to protect the value of its collateral, on May 24, 2019, United began to exercise certain remedies available to it under
the terms of the BRW Term Loan Agreement and related documents. In connection with the delivery by United of a notice of default
to BRW, Kingsland, was granted, in accordance with the agreements related to the BRW Term Loan Agreement, authority to manage BRW,
which remains the majority shareholder of AVH. After a hearing on September 26, 2019, a New York state court granted Kingsland
summary judgment authorizing it to foreclose on the BRW Loan Collateral under the BRW Term Loan Agreement. Kingsland then continued
with the foreclosure process, which was expected to result in a judicially supervised sale of the BRW Loan Collateral. The New
York state court also granted Kingsland's motion for a preliminary injunction that, among other things, enjoins BRW Holding from
interfering with Kingsland's ability to exercise voting and other rights in certain equity interests in BRW. These rulings are
intermediate steps in the judicial foreclosure process in New York and are subject to appeal.
The judicial foreclosure process is subject to significant uncertainty
given the filing by AVH and certain of its affiliates of voluntary reorganization proceedings under Chapter 11 of the United States
Bankruptcy Code in the U.S. Bankruptcy Court for the Southern District of New York on May 10, 2020 (as described in more detail
below, the “AVH Reorganization Proceedings”). In light of the AVH Reorganization Proceedings, the New York state court
judge presiding over the foreclosure proceedings agreed to stay those proceedings until later this year. The repayment of the BRW
Term Loan is dependent on this judicial foreclosure process and the value of the BRW Loan Collateral, if any, during or upon the
conclusion of the AVH Reorganization Proceedings, and there is no assurance that a judicial foreclosure sale will be completed,
or, if completed, will result in the full satisfaction of all of the obligations under the BRW Term Loan, including the obligation
to repay United for any payment made in respect of our guarantee of the Cooperation Payment. In that regard, based on United's
assessment of AVH's financial uncertainty and the fact that Avianca has currently ceased operations as a consequence of the COVID-19
pandemic, during the three months ended March 31, 2020, the Company recorded a $697 million expected credit loss allowance for
the BRW Term Loan and the Cooperation Payment. Even if a foreclosure sale of the BRW Loan Collateral were to proceed, the amount
we receive from such a foreclosure sale may be inadequate to fully pay the amounts owed to us by BRW (including in respect of any
payment we make in respect of the Cooperation Payment, if any) and our costs incurred to foreclose, repossess and sell the collateral.
In addition, our ability to enforce a deficiency judgment against BRW in the event that the proceeds from the sale of the BRW Loan
Collateral in the judicial foreclosure are insufficient to repay the full amount of the BRW Term Loan may be limited. Any of these
circumstances may lead to a loss or delay in the repayment of the BRW Term Loan. In addition, depending on the impact of the AVH
Reorganization Proceedings on the equity interests of AVH, the value of the BRW Loan Collateral could be significantly and adversely
affected, or the BRW Loan Collateral could be eliminated entirely, and United may not be able to recover any amounts owed to us
by BRW (including in respect of any payment we make in respect of the Cooperation Payment, if any).
In November 2019, United entered into a senior secured convertible
term loan agreement (the “AVH Convertible Loan Agreement”) with, among others, AVH, as borrower, for the provision
by the lenders thereunder (including United) to AVH of convertible term loans for general corporate purposes. In December 2019,
United provided such a convertible term loan to AVH under the AVH Convertible Loan Agreement in the aggregate amount of $150 million
(the “AVH Convertible Loan”). See Notes 7 and 9 to the financial statements included in Part I, Item 1 of the Company's
Q1 2020 Form 10-Q for additional information regarding our investments in AVH and its affiliates and our guarantee of the Cooperation
Payment, respectively.
Upon the commencement of the AVH Reorganization Proceedings,
an automatic stay was imposed that prohibits us from attempting to collect pre-bankruptcy debts from AVH or its properties, including
repayment of the AVH Convertible Loan, and any other claims we may have against AVH or its affiliates unless we obtain relief from
the automatic stay from the bankruptcy court. The AVH Convertible Loan is secured by a pledge of equity interests in certain of
AVH’s major subsidiaries, including LifeMiles, Ltd., the indirect subsidiary of AVH that owns and operates the LifeMiles
frequent flier program and did not file for bankruptcy protection (“LifeMiles”), and, until released, certain Colombian
Peso-denominated credit card receivables owing to Avianca, a guarantor under the AVH Convertible Loan Agreement. However, the amount
of the claim with respect to the AVH Convertible Loan will be determined to be secured only to the extent of the value of the underlying
collateral securing our claim and there is no assurance that the AVH Convertible Loan will be repaid in full. The duration of the
AVH Reorganization Proceedings is difficult to predict, and United’s recovery on its claims, including possibly its secured
claim on account the AVH Convertible Loan, may be adversely affected by delays while a plan of reorganization is being negotiated,
approved by parties in interest and confirmed by the bankruptcy court until it ultimately becomes effective.
These transactions and relationships involve significant challenges
and risks, particularly given the AVH Reorganization Proceedings, the impact of the COVID-19 pandemic and the judicial foreclosure
process to which the repayment of the BRW Term Loan is subject. Furthermore, while we have worked closely with Avianca in connection
with the JBA, and have supported AVH by providing capital in the form of the AVH Convertible Loan, Avianca is a separately certificated
commercial air carrier, and we do not have control over its or AVH's operations, strategy, management or business methods. Avianca
is also subject to a number of the same risks as our business, which are described in the Company's 2019 Form 10-K, as updated
by the Q1 2020 Form 10-Q and this report, including the impact of the COVID-19 pandemic, competitive pressures on pricing, demand
and capacity, changes in aircraft fuel pricing, and the impact of global and local political and economic conditions on operations
and customer travel patterns, among others, as well as to its own distinct financial and operational risks.
As a result of these and other factors, including the AVH Reorganization
Proceedings and delays in foreclosure proceedings, we may not receive full (or any) repayment of our BRW Term Loan (including any
payment we make in respect of the Cooperation Payment) or our AVH Convertible Loan, and we may be unable to realize the full (or
any) value of the BRW Loan Collateral or the collateral securing the AVH Convertible Loan. As a consequence, we may not realize
a satisfactory (or any) return on our invested or loaned funds with respect to AVH and its affiliates.
Further, these investments may not generate the revenue or operational
synergies we expect, and they may distract management focus from our operations or other strategic options. Finally, our reliance
on Avianca in the region in which it operates may negatively impact our global operations and results if AVH does not successfully
emerge from the AVH Reorganization Proceedings or the COVID-19 pandemic, if the JBA is rejected in connection with the AVH Reorganization
Proceedings or if AVH is otherwise impacted by general business risks or performs below our expectations or needs. Any one or more
of these events could have a material adverse effect on our operating results or financial condition.
Cautionary Statement Regarding Forward-Looking Statements:
Certain statements in this Current Report on Form 8-K are forward-looking and
thus reflect the Company’s current expectations and beliefs with respect to certain current and future events and anticipated
financial and operating performance. Such forward-looking statements are and will be subject to many risks and uncertainties
relating to the Company’s operations and business environment that may cause actual results to differ materially from any
future results expressed or implied in such forward-looking statements. Words such as “expects,” “will,”
“plans,” “anticipates,” “indicates,” “remains,” “believes,” “estimates,”
“forecast,” “guidance,” “outlook,” “goals,” “targets” and similar expressions
are intended to identify forward-looking statements. Additionally, forward-looking statements include statements
that do not relate solely to historical facts, such as statements which identify uncertainties or trends, discuss the possible
future effects of current known trends or uncertainties, or which indicate that the future effects of known trends or uncertainties
cannot be predicted, guaranteed or assured. All forward-looking statements in this report are based upon information
available to the Company on the date of this report. The Company undertakes no obligation to publicly update or revise any forward-looking statement,
whether as a result of new information, future events, changed circumstances or otherwise, except as required by applicable law.
The
Company’s actual results could differ materially from these forward-looking statements due to numerous factors
including, without limitation, the following: the duration and spread of the ongoing global COVID-19 pandemic and the outbreak
of any other disease or similar public health threat and the impact on the business, results of operations and financial condition
of the Company; the risk that the MileagePlus Financing is not completed; the lenders’ ability to accelerate the MileagePlus
indebtedness, foreclose upon the collateral securing the MileagePlus indebtedness or exercise other remedies if the Company is
not able to comply with the covenants in the MileagePlus Financing agreement; the final terms of borrowing pursuant to the Loan
Program under the CARES Act, if any, and the effects of the grant and promissory note through the Payroll Support Program under
the CARES Act; the costs and availability of financing; the Company’s significant amount of financial leverage from fixed
obligations and ability to seek additional liquidity and maintain adequate liquidity; the Company’s ability to comply with
the terms of its various financing arrangements; the material disruption of the Company’s strategic operating plan as a result
of the COVID-19 pandemic and the Company’s ability to execute its strategic operating plans in the long term; general economic
conditions (including interest rates, foreign currency exchange rates, investment or credit market conditions, crude oil prices,
costs of aircraft fuel and energy refining capacity in relevant markets); risks of doing business globally, including instability
and political developments that may impact its operations in certain countries; demand for travel and the impact that global economic
and political conditions have on customer travel patterns; the Company’s capacity decisions and the capacity decisions of
its competitors; competitive pressures on pricing and on demand; changes in aircraft fuel prices; disruptions in the Company’s
supply of aircraft fuel; the Company’s ability to cost-effectively hedge against increases in the price of aircraft fuel,
if it decides to do so; the effects of any technology failures, cybersecurity or significant data breaches; disruptions to services
provided by third-party service providers; potential reputational or other impact from adverse events involving the Company’s
aircraft or operations, the aircraft or operations of its regional carriers or its code share partners or the aircraft or operations
of another airline; the Company’s ability to attract and retain customers; the effects of any terrorist attacks, international
hostilities or other security events, or the fear of such events; the mandatory grounding of aircraft in the Company’s fleet;
disruptions to the Company’s regional network as a result of the COVID-19 pandemic or otherwise; the impact of regulatory,
investigative and legal proceedings and legal compliance risks; the success of the Company’s investments in other airlines,
including in other parts of the world, which involve significant challenges and risks, particularly given the impact of the COVID-19
pandemic; industry consolidation or changes in airline alliances; the ability of other air carriers with whom the Company has alliances
or partnerships to provide the services contemplated by the respective arrangements with such carriers; costs associated with any
modification or termination of the Company’s aircraft orders; disruptions in the availability of aircraft, parts or support
from its suppliers; the Company’s ability to maintain satisfactory labor relations and the results of any collective bargaining
agreement process with its union groups; any disruptions to operations due to any potential actions by the Company’s labor
groups; labor costs; the impact of any management changes; extended interruptions or disruptions in service at major airports where
the Company operates; U.S. or foreign governmental legislation, regulation and other actions (including Open Skies agreements,
environmental regulations and the United Kingdom’s withdrawal from the European Union); the seasonality of the airline industry;
weather conditions; the costs and availability of aviation and other insurance; the Company’s ability to realize the
full value of its intangible assets and long-lived assets; any impact to the Company’s reputation or brand image and other
risks and uncertainties set forth under Part I, Item 1A., “Risk Factors,” of the 2019 Form 10-K, as updated by our
Q1 2020 Form 10-Q and this report, as well as other risks and uncertainties set forth from time to time in the reports we file
with the SEC.